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Question #90428 posted on 10/01/2017 3:08 a.m.
Q:

Dear 100 Hour Board,

What is life insurance supposed to cover? I'm trying to figure out how much to get and I think that knowing what is supposed to take care of would be a good start. I assume funeral expenses (but how expensive is a funeral?) and outstanding debts, but should it go beyond that?

-Adulting

A:

Dear Adulting,

It depends entirely upon your financial situation. If you have significant debt, then you should definitely have enough life insurance so your death wouldn't present an additional burden to your loved ones. Covering funeral expenses is a nice bonus too.

But the real reason you should have life insurance is to ensure the long-term wellbeing of your loved ones. If you have people who are dependent on your income, or if you are the primary breadwinner in your home, you don't want them to be emotionally AND financially devastated if you were to pass away. Therefore it's a good idea to have sufficient life insurance for them to get by on for whatever period of time you deem is most appropriate.

For instance, let's imagine you're a husband and a father of 3, with your youngest being 2 years old. You work full time, while your wife stays home with the kids. If you were to die, what would you want for your family? Do you want your wife to have a year to mourn and adjust before finding a job to support the family? Do you want her to be able to stay at home at least until your youngest has started school? Do you want her to be able to raise all the kids to adulthood without worry? Do you want to pay for their education, or leave her a comfortable retirement fund?

Of course, in an ideal world, you would be able to pay for all of those things, but naturally your premium will increase as the face value of your policy increases. So maybe the hardest part will be comparing what you can afford to pay for life insurance versus the balance you want to leave behind.

There are a few different ways to calculate what you want to leave. The one that makes sense to me is to multiply your income by the number of years that you want to provide for your family, so if you earn $50,000 a year and want to provide 10 years of security, you would want a $500,000 policy. However, it's also smart to examine your future financial needs, and plan accordingly. For instance, if you want to help your kids pay for college, then you should plan ahead for that when determining your policy.

If you have any more specific questions, it's best to ask qualified financial professionals, which I am not. Consult your bank, ask your family, and question your insurance agent, because chances are they've had your questions before. If you're still in school, and especially at BYU, I would highly recommend taking a personal or family finance class, because you'll learn a lot of important life skills, and the answers to questions like these.

Love,

Luciana

posted on 10/02/2017 7:57 p.m.
It is worth clarifying that debt is not passed on to the inheritors, but to the "estate". If assets in the estate are insufficient to cover the debts, and the debt was not cosigned for, then in most states the creditor has no legal basis come after the family (this doesn't seem to stop them from calling family members to "settle" the debt of their deceased loved one), although in some states the spouse may be responsible. Thus, significant debt of the deceased would only present an additional burden to loved ones insofar as it drains assets in the estate that otherwise would have been inherited and used to pay funeral expenses.

Also, life insurance is usually paid out directly to the beneficiaries (your loved ones), not the estate. What this means in practice is that life insurance payouts are not used to pay off outstanding debt obligations of the deceased, since the payment goes directly to beneficiaries, not the estate.

Sources: http://blog.credit.com/2016/11/debt-after-death-10-things-you-need-to-know-162406/

http://finance.zacks.com/can-life-insurance-proceeds-paid-beneficiary-forced-pay-deceaseds-debts-6368.html